This is how you persuade a VC to give you millions

Payal Kadakia Pujji of Classpass, Fred Destin of Accel,
Sarah Leary of Nextdoor, and Jim Edwards of Business Insider on stage at Web Summit in Lisbon.Web Summit

How do you persuade a venture capitalist to give you money?

Traditionally, startup founders prepare a deck of slides and make a formal presentation to a VC fund in the hopes of getting an investment. But it turns out that "the pitch" and "the deck" are only a small part of what VCs really think about before they decide to write someone a cheque for thousands or millions of pounds. They are often more concerned with how "intense" you are about the problem you're trying to solve, whether you've got a good story to tell ... and whether you're a jerk or not.

Jim: We’re here to talk about what makes a really good pitch, and I’m going to start with you Fred because you have almost certainly heard many more pitches than maybe anyone in this room. Very briefly - what makes a good pitch?

Fred: You have 15 minutes at the beginning to grab the attention, and to raise the pulse, and to make your audience, or your VCs, care. And I think if you don’t excite me, scare me, grab me in the first 15 minutes, you’re probably unlikely to raise my level of attention after that. And then it’s all about building credibility and trust and sort of getting to a point where I feel I want to write you a cheque. But I think the primary thing about the pitch is doing something that’s big enough, interesting enough, important enough, and with enough intensity that I’m leaning forward and I’m wanting to back you.

Jim: Why do you want to be scared by a founder though? You’re giving these people money, why do you want them to frighten you?

Fred: I honestly like founders with a bit of an edge, and I want people where I’m thinking - wow, I’m not sure I wanna bet against that guy or that lady, because they scare me a little. And most of the people I’ve backed, like Will Shu at Deliveroo or Alex Chesterman at Zoopla, they have that edge, and they are people you just do not want to be in competition against.

"One of the most important things is to have a story. Without a story, people aren’t going to connect to what you’re telling"

Jim: Payal - does this sound familiar?

Payal: Absolutely, I think one of the most important things is to have a story. Without a story, people aren’t going to connect to what you’re telling, what you have a pain point about. It’s so important for them to know why you’ve created the company, without that connection to the broader vision that you have - why are you going to do it? What are you going to accomplish?

Jim: Literally a story? Like a really good narrative?

Payal: Yeah, I mean look - you can have slides. One of my favourite investors that I met, I literally sat down and he goes: “don’t show me slides, just tell me what you’re building, give me the high-level metrics,” and I spoke from my heart, I told him the story of my company, and it was the most magnificent investor, ended up becoming my series A investor, because it was a genuine, authentic story that I told him.

"Do I wanna bet on you, do I wanna bet on the team?"

Jim: OK, Sarah this thing about passion, this keeps coming up. It sounds like a meaningless corporate buzzword, is it real?

Sarah: Without a doubt...

Jim: Some companies are just solving problems aren’t they?

Sarah: I think it’s absolutely important to identify a real pain point and a solution that you can bring to the market. Make sure that it’s a big market that you’re going after, that always helps, and why you’re gonna win. But I think one of the things that happens is - people are trying to understand "do I wanna bet on you, do I wanna bet on the team?" And I think that’s where the passion comes in, because the reality is - in a lot of cases, and I’m sure there’s some examples here - an investor sometimes will bet on a team and an idea, but the idea ends up changing and they’re still invested in the team. And they need to feel like, is this team going to be able to manage the ups and downs, twists and turns? If it doesn’t work out, are they going to have the “stick-to-it-iveness” to pivot it into something else? And I think you could go through almost every major win, in terms of companies, and there has been a major turning point where betting on a team and its passion has lead the investor to be in a situation where they’ve come out the other end with a great outcome.

"People who invest in models over teams are dumb"

Jim: Is this true Fred? Do you buy the management, not the model?

Fred: So, people who invest in models over teams are dumb. You know there are people that say: “great market, B team,” I’ll work on the team. It’s idiotic. Because we know those stories. I absolutely think, by the way, the narrative is core. If you think about TJ Parker at Pillpack - if TJ had come into my office and said: “I’m building an online pharmacy,” it would have been a short conversation. But he comes in and he says: “I’m helping people with complex conditions live better, I’m giving them back their lives because they don’t have to do pill boxes ... I’m making sure they medicate properly, and I’m all about life, I’m all about enjoying life, my mission is to help people live better lives through better pharmacy,” that to me is a narrative that I can relate to because I am thinking: “I can hire people against that narrative, I can build partnerships against that narrative, I can market against that narrative - and, it’s imbued with a sense of purpose.” And sense of purpose is what carries you through the dark days, because every company has dark days when you think all is lost. If you’re not frickin' passionate about what it is you’re building, you will die through these times.

Jim: OK, so not buying the correct management is a VC mistake. In terms of pitching - Payal, what mistakes have you seen companies make, or what mistakes have you seen in pitch decks?

Payal: Yeah I think when I see entrepreneurs, they tend to talk about the market and the industry - which is obviously very important, but the most important thing is you’re product. What are you selling? And does it really have product-market fit? And if you can convince me …

Jim: Are VCs specifically asking that in the pitch? “What is the product-market fit” - you have to have a good answer for that?

Payal: You need to be able to show through metrics that something’s working. I think early on it goes back to having the story and why they’re investing in you. But once you have the story and you’re starting to make progress - they want to make sure they see you and the metrics are making progress. One of my favourite articles that I read told me - people invest in lines, not dots.

"Early on maybe should not be talking about revenue"

Jim: What does that mean?

Payal: You need to keep having data points of progress, so even if an investor - and, we’ve all had investors say no to us - there are times where you go back, and you keep them in the loop, and you keep telling them the progress and the perseverance you have. And so, the story comes through those dots - that eventually forms a story for investors if you don’t necessarily get them on the first try. And I think that, that story is once again connected to the heart of all this.

Jim: Sarah, does this ring true with you?

Sarah: So, I think one of the most common mistakes is something that you might hear Reid Hoffman [the founder of LinkedIn] talk about - and that is, there are times when you’re out and you’re doing a financing strategy, and it’s usually early on, and you’re talking about the market you’re going after, the idea that you have, really the vision of the company. And then there are times when you’re out using the information around revenue progress that you have. And I think sometimes, early young companies start talking about a little bit of revenue, and they start conflating those two scenarios. Am I ready to invest in this company as an investor based on this vision? Or is it that this is a company that has traction and much more predictable revenue? That may sound strange, that you early on maybe should not be talking about revenue, but rather talking about revenue potential but we haven’t started our revenue efforts, or we’re still testing, but let’s not make that the focus of the thesis of the investment. And I think, sometimes early or young entrepreneurs conflate those two things and then you end up with a confusing message and when there’s confusion in an investment, it usually doesn’t happen.

Fred: My favourite mistake, is - I play tricks with people. I’ll open, I’ll ask a very wide question about your industry and half the time the entrepreneur goes on for 15 minutes into a global answer to the question, and I’m sitting there thinking - wow, we have 45 minutes together and you have gone onto a wild tangent talking about the market. And actually, you’re not managing to the outcome that you want which is to get that meeting or to get that cheque. And so we play old tricks like that to see whether the person is like in control, and understands what they’re trying to achieve, or whether they get thrown off-track pretty fast. Because to me that’s an indication of awareness, self-confidence etc, that they know in 45 minutes I’ve gotta get this guy to lean forward or write me a cheque.

"I think slides are a crutch"

Jim: It's interesting that you’re quite focused on the awareness and focus of the pitch as if it’s a piece of theatre. There’s money at stake here on a real thing of substance, why are you interested in the theatre?

Fred: I think that if you watch a person in a situation of stress and just see how they perform against the objective they have in their mind, which is to get us engaged. And so, for me it’s a proxy as to whether they can sign a large partnership, they can sell their company in M&A, they can hire a tough guy ... you know, all these are indicators of how someone performs. And I think environmental awareness and EQ in a CEO is massively important. Because the role of the CEO at the end of the day is gonna be: define the vision, repeat the vision a million times, make sure people are aligned with the vision, and you know find a way to move the ball down the field everyday. And these soft qualities end up being absolutely paramount to how a company is performing.

Sarah: Before I was an entrepreneur I worked at Greylock as an associate and so I got to hear the other side of how a partnership talked about an investment. And I was blown away with the amount of time that the partners would talk about the people, about how they approached the situation, and also the dynamic between the management team. How did that work out? Oh it looks like these two people aren’t getting along, and how’s that gonna resolve itself? I was just blown away, especially with early stage companies, that it was a lot more about the people, and to your point [points at Fred], how do they handle the stress? What’s gonna happen with the conflict? Do we think the CEO is going to be able to scale? If we went to them and said we need to replace you, how would they handle it? That almost dominated more than 50% of the conversation - not about how big is the market and what’s the revenue potential?

Jim: More than 50% of the conversation?

Payal: I would say, most people focus on selling their slides when they’re putting together their market deck and what they’re going to do in the pitch...

Jim: Yeah, before I started this panel, I thought the deck was the important thing.

Payal: You have to learn to sell yourself, I think people forget they need to look at where else they’ve really performed in their life, where they’ve been in a place where they were confident. And wherever that energy point is for you, you need to actively recreate in that meeting. And sometimes, look the meeting might be in an elevator, you have 2 minutes with somebody. Sometimes it might be a 45-minute meeting and you need to be able to shift your message, shift your outcome by what you say, by authentically being there and being able to say what’s important to you.

Fred: I think slides are a crutch. Half the time if you close the slide deck and you focus on and really present to the person in front of you - you will do a much better job.

"I invest in people because I, quote-unquote, fall in love with them"

Fred: If people want slides, you should be able to provide it for them because you’ve got to be professional but I invest in people because I, quote-unquote, fall in love with them - and it’s an emotional act of saying I wanna be in business with that person. That’s what you’re trying to achieve. They rest is all mechanics. Is your market big enough blah blah blah. … You know we’ll do the diligence, we’re rigorous, but it’s really around faith. It’s an act of faith, and that’s what you’re trying to elicit.

Payal: It goes back to the point of telling a story - if you’re telling a genuine story to anyone, you don’t need slides, if it’s a real story, you really rely on the message, not on slides to carry you through.

Sarah: And that being said I do think that there’s value in going through the exercise of building the slides. But you shouldn’t need the slides to tell the story it just helps you organise your thoughts, and have a crisp narrative.

Fred: Or put it a different way: if you don’t own your material 100%, you won’t be able to relax into the interaction and understand how to deal with interruptions, see whether someone in the audience is zooming out…

Sarah: Checking their phone, a favourite thing the VCs like to do.

Fred: Right, so you want to be absolutely on top of of your metrics. We don’t like people who don’t own their metrics because ultimately you’re building a business so they must be like a reflex, so then you can really focus on the interaction. So that’s the reason why you need great materials and you need to own them, but it’s so you can almost free yourself of the material and be present.

Jim: Have you lost a pitch if a VC starts checking his or her phone in a meeting? Is that the kiss of death?

Sarah: Yes, absolutely.

Jim: That’s the kiss of death, OK.

"Investing is like dating, I wanna make sure we have a bad date and see whether we recover"

Sarah: You know, one thing that we haven’t talked about - you can talk a lot about the pitch and what you’re bringing to the table - but, I do think it’s a 2-way interview, you’re interviewing whether or not you want this person to be on your board and to be a part of your team. In many cases you’re interviewing someone to be your boss and so if the pitch is going well and they’re engaged or excited, I think that there’s an opportunity to ask some of the questions about what that person, the potential investor, can bring to the table. And hopefully, you’ve done your research to know “you’ve invested in these 3 companies, this is part of the reason why we think there’s a good match with having you invest in our company and being on the board.”

Jim: And also there will be bad times right? And you need these people to support you between the bad times, and support you and not abandon you and write you off.

Fred: I always makes sure that we have a disagreement before investing. And the reason is that I wanna know whether our conflict resolution mechanism is healthy. Because there are times where - I’m here because I wanna help you build a great business, hopefully we can be friends. I’m great friends with TJ Parker, I’m also the guy that pushes him the most - why? Because I care. I care that he builds a great company, which means I wanna know that when tough times comes, we have a way - it’s like a couple, right? - we have a way of conflict resolution that’s healthy, and where the right questions get asked. So before investing, investing is like dating, I wanna make sure we have a bad date and see whether we recover.

Payal: The other thing about people, which I’ve learned too, is the person who introduces you to the investor is really important too.

Jim: Why?

Payal: Because it’s coming with their vote of confidence, their recommendation - I’m sure there are people where, one of your portfolio company’s CEOs that’s really successful introduces you to someone, you’re going to take that pitch in a really different way than if someone random sent you the email. [Fred and Sarah agree] And I think that’s really important - when you find the right person, do research, figure out what type of company the person invests in and then figure out who should be the right person to introduce you to that investor.

"I’d rather not raise money than take money from arseholes. It is so painful, your life is too short, it takes the fun out of it, it takes the sense of mission and purpose out of it and when people say bad boards destroy companies all the time, it is absolutely true"

Fred: My best marketing is the entrepreneurs we’ve backed, including the ones that failed.

Sarah: That’s a great point. One of the things that I really was impressed, Greylock used to do this when you were going down the path and negotiating - they say, happy to have you talk to some of our other CEOs. And say, in fact, we will put you in touch with CEOs where the company - it didn’t work out. And I encourage every entrepreneur - go talk to some of the CEOs where maybe the company didn’t work out and understand what that investor was like during that period of time, because you’ll really learn how they handle adversity, how they treated you, and just what were their priorities better than what you find out through their successes.

Fred: So after over 15 years in the industry, I would recommend to people today - I’d rather not raise money than take money from arseholes. It is so painful, your life is too short, it takes the fun out of it, it takes the sense of mission and purpose out of it and when people say bad boards destroy companies all the time, it is absolutely true and I think that it will damage you as a human being to be in business with arseholes because you cannot fire your investors. You can’t fire me, I can fire you but you can’t fire me.

Jim: And people don’t realise how long these relationships are going to be right? The average American marriage I believe lasts about 7 years, but these relationships with VCs are gonna go on a lot longer than 7 years right? And you will be seeing these people every day.

Payal: You should consider it your family.

Sarah: Absolutely.

Fred: There’s the famous 8-hour road test which is: do you get along with that person well enough that if you were to drive from Boston to Chicago or whatever, you’d still have stuff to talk about by the time you’d get there? And not the US election.

"Most people think design is easy because they don’t get it"

Jim: So how far, in a pitch at an early stage, how far into the underlying tech should you go? Do VCs wanna know about the code base and how proprietary it is and whether you have a unique solution? Or do they just want to know what it does and what problem it solves?

Fred: I think it depends - I care a lot about product and so I’ll always go demo, understand your design ethos, I’m very design-centric, so are you over-investing in design or do you take it for granted? Most people think design is easy because they don’t get it, and then I want to know what your stack is. Whatever evolutionary curve of the stack you’re on is a very good indication of whether you’re coming from the future or the past. And when we have to hyper-scale companies like Deliveroo, you know we’re now in 60 cities with massive volume, if you don’t have the tech infrastructure to support that and you're not thinking dynamically about how you’re going to deal with that, you’re probably going to fail. So I think anybody who underestimates tech, just does not understand tech.

Jim: Sarah, at Greylock, did you see great ideas with weak tech?

Sarah: Occasionally you would see that, but for the most part you had the opportunity to sit down and say: if tech was core to this, let’s do a deep dive and understand it better. And sometimes that was done by one of the partners and other times it was done by a close friend of the firm that would take a look at it but it depends on the company and it depends on the stage.

Jim: OK, we are out of time, but thank you very much, this was absolutely fascinating.